Newsvendor stockouts and option discriminability

Abstract

Decision making is the process of resolving conflict between different options that vary in discriminability. We study how conflict between the goals of profit maximisation and customer satisfaction determines decision making in the newsvendor problem. The paper consists of three studies which explore conflict from different positions. In Study 1 we show that stockouts cause newsvendor subjects to increase their stocking levels, whereas this effect is absent in a neutrally framed version of the same problem. Conflict is reflected in longer response times under low profit margin, where there is an increased likelihood of ex-post conflict, than under high profit margin. We also find that some subjects are more concerned than others of nonpecuniary factors, and this affects their decision making. In Study 2 we show that an endogenous conflict manipulation affects newsvendor behaviour. We theorise that broad bracketing (reappraisal of the choice situation) should decrease conflict, for which we find some evidence, but we also find that subjects decide less optimally when they use broad bracketing than when they use narrow bracketing. In Study 3 we use a binary newsvendor problem and model the decision process of the newsvendor using the diffusion decision model. The results show that, as in Study 1, the profit margin environment affects how newsvendors respond to conflict. Furthermore, the relative decision evidence towards the optimal choice accumulates at a slower rate after there has been a stockout. Our findings highlight that understanding decision biases in operations should include non-monetary goals, such as avoiding stockouts.